Construction of an economic model of resource use: Research and development of substitutes for non-renewable resources and waste

Abstract

The research questions for the thesis were: How the existing economic models based on Romer's (1990) endogenous research and development (R&D) growth model could be extended to be able to research the optimal allocation of R&D resources? What are the most significant factors affecting on the R&D sector investment allocation?

A literature review on the existing resource economics and backstop substitution models was introduced. In order to put this thesis in context a closer look at the historical development of the substitution technologies, theoretical concepts and resource economics theory was taken from the early 1900 century to this day. In focus was especially recent literature with economic models with similar characteristics as in the model constructed here, most notably models derived from Romer (1990). Some of the literature was also used as a reference for the results part of the thesis.

The purpose of this thesis was to construct a framework for economic model with four sectors. The model is a discrete time model that is constructed so that the primary resources (non-renewable and renewable) are competitors for the secondary recycled resources as the input for the final production. The use of each resource is determined by the marginal cost of production. As the non-renewable resource becomes scarcer and their price increases, the investments in R&D sector increases as the possibilities for substitution increases as the increasing capital base increases the resource utilization level which increases the possibilities for substitution for backstop resources. Meanwhile the increasing technological level decreases efficiency of technological improvement.

We have four resource stocks that can be utilized at different steps of the production process as raw materials for the production. These include the non-renewable resources that can be substituted with renewable resources as raw materials to the system. There are the waste and resources-in-use stocks that are dependent on the production volumes. The model is structured on the basis of four sectors, two industrial sectors and two technology sectors. This approach is different from commonly used three sectors model with two industries and one technology. The non-renewable resources can be substituted by renewable resources through substitution technology R&D. On the other hand the waste associated with depreciation of resources-in-use, which also causes harm to renewable resources, can be substituted by recycled resources through recycling technology R&D. The recycled resources are secondary resource base that can replace a part of primary natural virgin resources consumption. The model has intermediate sector producing intermediate goods from natural resources. The intermediate sector is using technology licenses bought from the substitution technology sector to replace a part of non-renewable resource use. The final product sector is producing the final goods for consumption and capital by utilizing labor, capital and intermediate sector production and recycled resources for which the recycling technology sector sells licenses. The basic inputs for the system are capital, resources and labor.

The questions of sustainable steady state growth path and optimal resource allocation are only discussed but not solved in this thesis. The most remarkable results from the model are that the R&D resource allocation in equilibrium is mainly dependent on the volumes and the price changes in different sectors.